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Session One:Session One:Tax Systems and Taxpayer y p yBehavior
2009 IRS Research Conference2009 IRS Research Conference
M i th I t f T S tMeasuring the Impact of Tax Systems on Economic Behavior
Using New Cross-Country Data
Leslie Robinson, Tuck School of Business at DartmouthJoel Slemrod, University of Michigan
2009 IRS Research Conference
MotivationMotivation
• Tax systems are multi-dimensional; e.g., rates and bases as stated may or may not be welland bases as stated may, or may not be, well administered and enforced.
E i ti t t di f th i t f• Existing cross-country studies of the impact of tax systems on behavior use measures of tax rates, and (sometimes) recognize the importance of administration and enforcementimportance of administration and enforcement using rough proxies.
• Leaving out important aspects of tax systems• Leaving out important aspects of tax systems may bias estimated partial effects of tax rates, and/or miss entirely the effects of other tax system features.y
Overview
• We construct 38 measures of tax system aspects y pfor 44 countries based on OECD (2006) and in this paper we examine 10 measures in 1 important context.context.
• We analyze the relation between new and existing proxies for tax administration and enforcement.p
• We re-examine the tax system as a determinant of the size of the informal economy (in the process y ( pwe search for exogenous variation in our measures).
Existing MeasuresEconomics Literature
• Tax rates are negatively associated with unofficial activity, g y y,while the tax burden is positively associated; WEF SURVEY (Johnson et al -AER 1998)
• Tax rates are not associated with unofficial activity after controlling for better-run administrations; GDP and LEGAL
( )INDEX (Friedman et al -JPE 2000)
• Tax rates are positively associated with unofficial activity, p y y,while tax enforcement is negatively associated; SEIGNIORAGE and LEGAL INDEX (Ihrig and Moe -JDE 2001 -AEJ 2004)
Existing MeasuresEconomics Literature
• Tax administration has a positive association with theTax administration has a positive association with the number of new business registrations; TAX PAYMENTS AND HOURS Djankovet al. (working paper, 2008)
• Tax rates have a negative association with self-l t h t f t i t demployment when tax enforcement is strong and no
association when tax enforcement is weak; CORRUPTION INDEX(Torrini -LE2005)INDEX (Torrini LE 2005)
Existing MeasuresFinance and Accounting Literature
• Tax enforcement has spillover effects on corporate p pgovernance; WEF SURVEY (Dyck and Zingales -JF 2004)
• Governance (but not tax enforcement) affects the relation between corporate tax rates and corporate p ptax revenues; WEF SURVEY (Desai et al. -JFE 2007)
T f t t i i t• Tax enforcement constrains earnings management; WEF /IMD SURVEY (Haw et al. -JAR 2004, Wysocki -JAR 2004))
New Measures (OECD, 2006)Table 1
1 U fWi hh ldi 6 U f R i1. Use of Withholding– for 6 payment types
2 TaxSystem(forindividuals)
6. Use of Reporting– for 7 payment types
7. Self-Assessment2. Tax System (for individuals)– 4 classifications
3. Collect Power
– who computes tax liability?
8. Use of Matching– for 6 payment types
– out of 15 types of powers
4. Maximum Penaltyforfailuretocorrectlyreporttax
p y yp
9. Bank Access– strength of back secrecy laws– for failure to correctly report tax
liability
5. Administrator Coverage
strength of back secrecy laws and revenue agents’ ability to overcome them
10. Verification Power– revenue agent per 1,000 workers – search and seizure powers
CorrelationsTable 2 (top)
r pita
om
e
Per
Cap
Inco
1 Per Capita Income 1 0000Per Capita Income 1.0000
Tax Hours -0.5371Tax Payments -0.4371
Corruption 0.8154Bribery 0.7543
Law and Order 0.7399Seigniorage to GDP -0.5827
Seigniorage -0.7281T C li 0 5944Tax Compliance 0.5944
Tax Burden 0.2682
CorrelationsTable 2 (bottom)
r Cap
ita
com
e
x H
ours
x Pa
ymen
ts
rrup
tion
iber
y
w a
nd
der
gnio
rage
to
DP gn
iora
ge
x mpl
iane
x Bu
rden
Per
Inc
Tax
Tax
Cor
Bri
Law
Ord
Seig
GD
Seig
Tax
Com
Tax
1 2 3 4 5 6 7 8 9 10 Per Capita Income 1.0000 (0.5371) (0.4371) 0.8154 0.7543 0.7399 (0.5827) (0.7281) 0.5944 0.2682
Use of Withholding (0.4399) 0.4317 0.2278 (0.5533) (0.4796) (0.3090) 0.3258 0.5713 (0.4351) (0.0654) Administrator Coverage 0.3078 (0.3174) (0.1245) 0.2642 0.2505 0.4718 (0.3198) (0.6254) 0.0358 0.0886
Tax to GDP 0.4902 -0.3114 -0.3161 0.4268 0.4112 0.4519 -0.3634 -0.5586 -0.0075 -0.2133 Self Assessment -0.2851 0.2833 0.0205 -0.4015 -0.2907 -0.3010 0.3845 0.3532 -0.0622 -0.1618
System1 -0.3466 0.3305 0.0255 -0.3965 -0.2651 -0.2699 0.1374 0.2001 -0.1856 0.0140 System2 0.0198 -0.0062 0.1208 -0.0415 -0.1388 0.0150 0.1137 0.1240 -0.0641 -0.1727 System3 0.3365 -0.2653 -0.1752 0.4364 0.4111 0.3414 -0.2188 -0.3677 0.0996 0.0177 System4 0.1869 -0.2626 -0.0110 0.2603 0.2025 0.0426 -0.1469 -0.0840 0.3292 0.2339
Use of Reporting -0.2928 0.4461 0.0272 -0.3449 -0.3103 -0.1453 0.2246 0.6906 -0.0906 -0.0350 Collect Power -0.3733 0.1880 -0.0016 -0.3161 -0.3319 -0.2930 0.1237 0.2143 -0.4962 -0.3489
Max Penalty -0.3059 0.3612 0.1380 -0.1812 -0.2114 -0.2130 0.2642 0.3331 -0.0339 0.2123
CorrelationsCorrelations
• Countries with strong legal systems /less corruption:– Less self-assessment of tax liabilities– Less use of withholding and information reporting
L t f ll ti f t d bt– Less power to enforce collection of tax debts– More tax administrators per worker
• Why should we characterize these countries as having strong tax administration and enforcement or low tax burdens?
MAXIMUM PENALTY RATE ADMINISTRATOR COVERAGE PER CAPITA INCOME
LOWEST QUARTILE (1)
(2) Australia
(1)Chile
(2)Argentina
(1)Argentina
(2)Cyprus
Cyprus Finland Iceland Japan
Luxembourg
CanadaFrance
Hungary Norway
USA
ChinaJapan
Mexico Singapore
South Africa
Austria Cyprus
Italy Lithuania
New Zealand
ChileChina Latvia
Mexico Russia
HungaryItaly
Lithuania New Zealand
SingaporeLuxembourg Russia
South Korea Sweden
USA
South AfricaSouth Korea
USA
New Zealand Spain
Turkey
RussiaSouth Africa
Turkey
SingaporeSouth Korea
Spain
(3) HIGHEST (3) (4) (3) (4)Argentina
Latvia Lithuania Mexico
Netherlands
QUARTILE (4) Austria Belgium
Chile China
Australia Canada Finland France
Hungary
Belgium Denmark Iceland Ireland Latvia
Australia Belgium Finland France Japan
Austria Canada
Denmark Iceland IrelandNetherlands
New Zealand Spain
Turkey UK
ChinaDenmark Ireland
Italy Singapore
HungaryRussia
Sweden UK
Latvia Luxembourg Netherlands
Norway
JapanNetherlands
Sweden UK
IrelandLuxembourg
Norway USA
g pSouth Africa
WITHHOLDING REPORTING PER CAPITA INCOME
LOWEST QUARTILE (1)
Australia Canada
k
(2)Austria Cyprus Finland
(1)Argentina
Austria Belgium
b
(2)Australia Canada Estonia
(1)Argentina
Chile China
(2)Cyprus
Czech RepublicGreece
Denmark France
Luxembourg Netherlands
Norway
GermanyIceland Malta
New Zealand Sweden
LuxembourgNetherlands
Slovak RepublicSwitzerland
France Germany Ireland Malta
New Zealand
EstoniaMexico Poland
Slovak RepublicSouth Africa
HungaryMalta
New Zealand Portugal SloveniaNorway
Singapore South Africa
USA
SwedenSwitzerland
New Zealand Norway
South Africa Sweden
South AfricaTurkey
SloveniaSouth Korea
Spain
(3) HIGHEST (3) (4) (3) (4)Argentina Belgium
Chile Czech Republic
Estonia
QUARTILE (4)China
Hungary Ireland Japan
DenmarkFinland Greece
Hungary Iceland
Chile China Cyprus
Czech RepublicJapan
AustraliaBelgium Finland France
Germany
AustriaCanada
Denmark Iceland IrelandEstonia
Greece Poland
Portugal Slovak Republic
JapanMexico
South Korea Spain
Turkey
IcelandMexico Poland
Singapore Slovenia
Japan Portugal
Spain Turkey
USA
GermanyJapan
Netherlands Singapore Sweden
IrelandLuxembourg
Norway Switzerland
USASlovenia
UK South Korea
UK UK
WITHHOLDING REPORTING CORRUPTION
LOWEST QUARTILE (1)
Australia Canada
D k
(2) Austria Cyprus Finland
G
(1)Argentina
Austria Belgium
L b
(2)Australia Canada Estonia F
HIGH (1)Argentina
China Czech Republic
G
(2)Cyprus Estonia
Hungary JDenmark
France Luxembourg Netherlands
Norway
GermanyIceland Malta
New Zealand Sweden
LuxembourgNetherlands
Slovak RepublicSwitzerland
France Germany Ireland Malta
New Zealand
GreeceMexico Poland
Slovak RepublicSouth Africa
JapanMalta
Portugal Slovenia
South Koreao aySingapore
South Africa USA
S edeSwitzerland
e ea a dNorway
South Africa Sweden
Sou caTurkey
Sou o eaSpain
UK
(3) HIGHEST (3) (4) (3) LOW (4)Argentina Belgium
Chile Czech Republic
Estonia
QUARTILE (4)China
Hungary Ireland Japan
DenmarkFinland Greece
Hungary Iceland
Chile China Cyprus
Czech Republic Japan
AustriaBelgium Canada
Chile France
AustraliaDenmark Finland Iceland
New ZealandEstonia Greece Poland
Portugal Slovak Republic
JapanMexico
South Korea Spain
Turkey
IcelandMexico Poland
Singapore Slovenia
Japan Portugal
Spain Turkey
USA
FranceGermany Ireland
Luxembourg Netherlands
New ZealandNorway
Singapore Sweden
Switzerland Slovenia
UK South Korea
UK USA
SELF-ASSESSMENT TAX SYSTEM
(INDIVIDUAL TAX)CORRUPTION
(INDIVIDUAL TAX)DO NOT USE
Austria Belgium Denmark Finland
SYSTEM 1Argentina
Austria Brazil Chile
SYSTEM 2 Australia Belgium Canada Greece
HIGH (1)Argentina
China Czech Republic
Greece
(2)Cyprus Estonia
Hungary Japan
Germany Greece Iceland
Luxembourg Netherlands
China Cyprus Czech
Republic Germany
Hungary India Malta Poland
Portugal
Mexico Poland
Slovak Republic South Africa
Turkey
pMalta
Portugal Slovenia
South Korea Spain
NorwaySingapore Slovenia
South Africa Sweden
IrelandItaly
Japan South Korea
Latvia Lithuania
Spain USA
UK
USE LithuaniaLuxembourg
Mexico Netherlands New Zealand
Russia
USEArgentina Australia Canada
Chile China
MaltaMexico
New Zealand Poland
Portugal
SYSTEM 3 Denmark Estonia Finland Iceland
(3)Austria Belgium Canada
Chile
LOW (4)Australia Denmark Finland Iceland
Slovak Republic Slovenia
South Africa Turkey
UK
China Cyprus
Czech Republic Estonia France
Hungary
PortugalSlovak Republic
Slovenia South Korea
Spain Switzerland
Iceland Norway Sweden
ChileFrance
Germany Ireland
Luxembourg Netherlands
IcelandNew Zealand
Norway Singapore Sweden
SwitzerlandSYSTEM 4
FranceUKIreland Japan
Turkey UK
USA
USA France
Singapore Switzerland
Informal Economy – Prior AnalysisInformal Economy Prior Analysis
Johnson et al (AER 1998) Freidman et al (JPE 2000)Johnson et al (AER 1998)
• Johnson et al (1998) regressed the level of IE against a measure of tax rates and an executive
Freidman et al (JPE 2000)
• Freidman et al (2000) regressed the level of IE against a measure
f “l d d ”of tax rates and an executive assessment of the tax burden, interpreted as “the way the tax system is administered.”
of tax rates, a “law and order” index and (sometimes) GDP per capita.
• Finding: High IEs are associated with low tax rates, and high tax burdens. The two RHS variables
• Finding: Tax rates have a negative affect on IE, but have no effect once one controls for “law and
d ” GDP ( hi h hare, however, not entered into the regression at the same time.
order” or GDP (which have a negative effect on IE).
IV RegressionsTable 4
1 7 8Independent Variables
2 3 4 5 6FJKZ RS
0.3573 *** 0.4531 *** 0.4772 *** 0.5046 *** 0.4185 *** 0.5690 *** 0.5717 *** 0.6218 ***(0.0875) (0.0783) (0.0636) (0.0654) (0.0893) (0.0740) (0.0653) (0.0666)-0.3654 * 0.0789 0.3002 0.3481 -0.4786 ** -0.0866 -0.1690 -0.0871
(0.2012) (0.2170) (0.2149) (0.2137) (0.2193) (0.2876) (0.2607) (0.2732)-0.0932 *** -0.0377 -0.1027 *** -0.0547 *
Variables FJKZ RS
Intercept
Tax Rate
Log GDP Per (0.0243) (0.0232) (0.0344) (0.0298)
-0.0492 *** -0.0410 *** -0.0349 *** -0.0247 **(0.0097) (0.0110) (0.0118) (0.0118)
First stage F 4.13 3.71 5.28 4.58 8.75 8.42 10.99 8.29Adj R-sq 0.0690 0.3732 0.5391 0.5564 0.0881 0.3912 0.4467 0.4808
N 32 32 32 32 40 40 40 40
Law and Order
gCapita
• Columns 1-4– IVs are legal origin,
• Columns 5-8– IVs are conflict and
N 32 32 32 32 40 40 40 40
religion, latitude and ethnic fractionalization from La Porta et al (1999)
democracy from Besley and Persson (2007)
(1999)
Informal Economy – New AnalysisInformal Economy New Analysis
• Tax rates have no significant effect on IE, while h fnew tax system measures have significant
positive and negative effects.
• In some specifications, per capita income and the legal environment have no significant effect.g g
• Suggests that the relationship between income d IE l f h iand IE may result from tax system choices
shaped by other institutional factors that are correlated with income.
IV RegressionsT bl 5Table 5
Intercept 0.7708 *** 0.6972 *** 0.0574 0.3286 0.4761 ***(0.0918) (0.0622) (0.3332) (0.1981) (0.1256)
Tax Rate -0.3494 0.0287 -0.4263 -0.3712 -0.2507(0 21 3) (0 216 ) (0 4220) (0 32 3) (0 2 90)(0.2173) (0.2167) (0.4220) (0.3253) (0.2590)
Log GDP Per Capita -0.0860 ** -0.0986 *** 0.0074 -0.0085 -0.0294(0.0330) (0.0317) (0.0666) (0.0212) (0.0317)
Law and Order -0.0093 -0.0355 *** -0.0133 -0.0103 -0.0248 **(0.0108) (0.0123) (0.0137) (0.0444) (0.0109)
M P lt 0 0524 **Max Penalty -0.0524 **(0.0204)
Administrator Coverage 0.0710 **(0.0267)
Collection Power 0.0396 *(0 0228)(0.0228)
Use of Withholding 0.0389 *(0.0210)
System1 0.1580 *(0.0874)
System2 0 1034System2 0.1034(0.0829)
System3 0.1928 **(0.0850)
1.872.291st stage F - System Measure 2.29
3.97 4.96 3.20 2.44 13.971st stage F - Tax Rate 6.59 7.81 5.60 5.56 4.32
Adjusted R-sq 0.5644 0.6210 0.4157 0.3753 0.5171 Sample 30 39 37 32 40
1st stage F System Measure
ConclusionConclusion
• Tax system aspects – other than rates – matterTax system aspects other than rates matter.
i h k ’ i f h i fl f• Ignoring them skews one’s view of the influence of tax rates on behavior.
• Unexplored variables await the attention of future presearch.
Session One:Session One:Tax Systems and Taxpayer y p yBehavior
2009 IRS Research Conference2009 IRS Research Conference
A PANEL ANALYSIS OF BEHAVIOUR CHANGE IN CANADIAN INDIVIDUAL INCOME TAX COMPLIANCEINDIVIDUAL INCOME TAX COMPLIANCE
Presented by Attah Boame July 8, 2009
2009 IRS Research Conference, Washington, D.C., USA
OUTLINEBackground and Objectives
Methodology
Study Results
fAreas for Further Research
Questions or Comments?Questions or Comments?
Background:Personal income taxes are a major source of income for the federal, provincial and territorial governmentsgovernments.Personal income taxes generated an average of $81.6 billion quarterly from 2000 to 2004 for q ythe federal government.
St d bj tiStudy objectives:To study the trends in Canadian individual yincome tax compliance from 1996 to 2002.To analyze the factors that influence individual income tax compliance for the study periodincome tax compliance for the study period.
Tax Compliance Definedp
The Compliance Measurement Framework (CMF) identifies the following main compliance requirements for individuals:
Filing required tax forms on time;
Reporting complete and accurate tax information; and
Paying any amounts due in a timely manner (without enforcement action).
Operational DefinitionT C liTax Compliance
Filing Compliance Rate - The number of g Co p a ce ate e u be otaxpayers filing on-time (i.e., with no late filing penalty) as a percentage of the panel population.Reporting Compliance Rate - The number of taxpayers reporting accurately (i.e., with a tax payable difference of less than or equal to $50payable difference of less than or equal to $50 between assessment and what is reported) as a percentage of the panel population.P C li R Th b fPayment Compliance Rate - The number of taxpayers without arrears interest charges or instalment interest charges as a percentage of the panel populationthe panel population
DataSources: Initial Assessment and Reassessment of individual taxpayers tax returns (T1)of individual taxpayers tax returns (T1)
Study period: From 1996 to 2002
Variables: As defined in the datasets
Type: Panel (Longitudinal) datayp ( g )• To achieve a balanced panel, only individual
taxpayers who filed their tax returns for all seven years are included in the analysis.y y
Observations:18,300,485 for each tax year
MethodologyMethodologyDescriptive Statistics
F di t ib ti d C t b l ti• Frequency distributions and Cross-tabulations
Multivariate Analysisy• Logistic regression (identifies the likelihood of the
individual taxpayers filing their taxes on-time, reporting their taxes accurately, and paying their p g y, p y gtaxes owing on-time, without enforcement action by the Agency).
CaveatsNon-filers are excluded from the analysis.Taxpayers with no tax payable are included in order to preserve the balanced structure of theorder to preserve the balanced structure of the data.The data are applicable to most T4 recipients (that is employees)(that is, employees).The number of observations for each tax year represent about 80% of the filing population for each tax yeareach tax year.Taxpayers over-reporting their tax payable are considered reporting compliant. Th l i ti i d lThe logistic regression models assume no interaction between variables (weak dependencies identified among independent variables)variables).
Study ResultsCompliance trends:
• Reporting compliance rate exceeded both filing and p g p gpayment compliance rates for the study period. Reporting compliance rate decreased from 96% in 1996 to 95% in 2002.
• Filing compliance rate exceeded payment compliance rate for all the years of the study period. Filing compliance rate increased slightly from roughly 92% in 1996 to 93% in 2002in 1996 to 93% in 2002.
• Payment compliance rate was lower than both filing and reporting compliance over the study period.
Filing, Reporting and Payment Compliance, 1996-2002
98
94
96
%)
90
92
Rat
e (%
86
88
1996 1997 1998 1999 2000 2001 20021996 1997 1998 1999 2000 2001 2002
Filing Reporting Payment
Study ResultsyDemographic trends:
• Females are more tax compliant (filing, reporting, and payment) than males.
• Middle age taxpayers are less tax compliant (filing, reporting, and payment) compared to the young and old taxpayers.
• Widowed taxpayers are more tax compliant (filing and reporting) than those in the other marital status
t icategories.
Canada, Filing Compliance by Gender (%), 1996-2002
93
92.5%)
92Rat
e (
91.51996 1997 1998 1999 2000 2001 20021996 1997 1998 1999 2000 2001 2002
Canada Male Female
Canada, Reporting Compliance by Gender (%), 1996-2002
97.5
96.5
%)
94.5
95.5
Rat
e (
93.51996 1997 1998 1999 2000 2001 2002
Canada Male Female
Canada, Payment Compliance by Gender (%), 1996-2002, y p y ( ),
90.5
92.5
%)
86.5
88.5
Rat
e (
84.5
86.5
1996 1997 1998 1999 2000 2001 20021996 1997 1998 1999 2000 2001 2002
Canada Male Female
Mean Compliance By Age Group (%),1996-2002
100.00
92.00
96.00
%)
84 00
88.00Rat
e (
80.00
84.00
0 14 15 24 25 34 35 44 45 54 55 64 65+0 - 14 15 - 24 25 - 34 35 - 44 45 - 54 55 - 64 65+
Filing Reporting Payment
Mean Compliance by Marital Status (%),1996-2002
98.00
90.00
94.00
(%)
82.00
86.00Rat
e
78.00Married Common- Widow ed Divorced Separated Single
Law
Filing Reporting Payment
Study Results yFiling Methods:• Taxpayers using electronic methods
(Efile, Telefile, and Netfile) have a hi h li t (fili tihigher compliance rate (filing, reporting, and payment) relative to taxpayers who use paper-filing (hard copy)use paper filing (hard copy).
Mean Compliance by Filing Method (%), 1996-2002
90 00100.00
p y g (%),
70.0080.0090.00
(%)
40.0050.0060.00
Rat
e
20.0030.00
Paper Efile Telefile EDI Internet HomeFiliFiling
Filing Reporting Payment
Study ResultsyMarginal Tax Rates:
Th li d li i h h• The payment compliance rate declines with the marginal tax rates. That is, the lower marginal tax bracket (16%) has a higher payment compliance rate relative to the other marginal tax brackets (22% 26%relative to the other marginal tax brackets (22%, 26% and 29%).
• The lower marginal tax bracket (16%) has the highest g ( ) greporting compliance rate compared to the other marginal tax brackets (22%, 26% and 29%).
Mean Compliance by Marginal Tax Rates (%), 1996-20021996-2002
85 0090.0095.00
%)
70 0075.0080.0085.00
Rat
e (%
60.0065.0070.00
MTR (16%) MTR (22%) MTR (26%) MTR (29%)MTR (16%) MTR (22%) MTR (26%) MTR (29%)
Filing Reporting Payment
Logistic Regression Resultsg g
Odds ratio analysis:Odds ratio analysis:• The Odds ratio indicates how much
more likely a certain event occurs in one ygroup relative to its occurrence in another group, all other things being the same For example how much moresame. For example, how much more likely are females (reference category) filing compliant compared to males?g p p
P t Fili C li O tParameters Filing Compliance OutcomeDemographic Factors Less Likely
to File LateMore Likely to File Late
Gender Male vs. Female 11%
Age Group Middle vs. Young 8%Old vs. Young 106%
Marital Status Widowed vs.Married/CL 26%Divorced vs.Married/CL 39%Separated vsSeparated vs.Married/CL 45%Single vs.Married/CL 27%Married/CL 27%
Parameters Filing Compliance Outcome
CRA Program Factors Less Likely to File Late
More Likely to File Late
Filing Method EFILE vs. Paper 385%g p
TELEFILE vs.Paper 603%
NETFILE vs.Paper 204%
Marginal Tax 22% bracket vsMarginal TaxRates (%)
22% bracket vs.16% bracket 5%
26% bracket vs.16% bracket 16%
29% bracket vs.16% bracket 85%16% bracket 85%
Parameters Filing Compliance OutcomeIncome Factors Less Likely
to File LateMore Likely to File Late
Pension Income Pension vs. NoPension 109%
RRSP Income Income vs. NoIncome 18%
Tax-ExemptIncome
Exempt vs. NoExempt 20%
Main Source of Investment/RentMain Source ofIncome
Investment/Rentvs. Wages 29%CapitalGains/Loss vsGains/Loss vs.Wages 32%Self-Employedvs Wages 2%vs. Wages 2%
P t R ti C li O tParameters Reporting Compliance OutcomeDemographic Factors Less Likely to
UnderreportMore Likely to Underreport
Gender Male vs. Female 33%Age Group Middle vs. Young 13%
Old vs Young 8%Old vs. Young 8%Marital Status Widowed vs.
Married/CL 10%Divorced vs.Married/CL 25%Separated vs.Married/CL 29%Single vs.Married/CL 4%
Parameters Reporting Compliance Outcome
CRA Program Factors Less Likely to More Likely to Underreport Underreport
Filing Method EFILE vs.Paper 152%NETFILE vs.Paper 133%
Marginal Tax 22% bracket vsMarginal TaxRates (%)
22% bracket vs.16% bracket 13%26% bracket vs.16% bracket 11%16% bracket 11%29% bracket vs.16% bracket 4%
Parameters Reporting Compliance Outcome
Income Factors Less Likely to Underreport
More Likely to Underreport
Pension Pension vs NoPensionIncome
Pension vs. NoPension 22%
RRSPIncome
Income vs. NoIncome 58%Income Income 58%
Tax-ExemptIncome
Exempt vs. NoExempt 178%
M i S I t t/R tMain Sourceof Income
Investment/Rentvs. Wages 3%CapitalGains/Loss vs.Wages 40%Self-Employedvs. Wages 17%
Parameters Payment Compliance Outcome
Demographic Factors Less Likely to Pay Late
More Likely to Pay Latey y
Gender Male vs. Female 30%Age Group Middle vs. Young 6%
Old Y 20%Old vs. Young 20%Marital Status Widowed vs.
Married/CL 19%Divorced vs.Married/CL 30%Separated vs.Separated vs.Married/CL 33%Single vs.Married/CL 2%Married/CL 2%
Parameters Payment Compliance OutcomeParameters Payment Compliance OutcomeCRA Program Factors Less Likely to
Pay LateMore Likely to Pay Late
Filing Method EFILE vs. Paper 170%TELEFILE vs.Paper 1,310%NETFILE vs.Paper 333%
Marginal Tax 22% bracket vsMarginal TaxRates (%)
22% bracket vs.16% bracket 35%26% bracket vs.16% bracket 51%16% bracket 51%29% bracket vs.16% bracket 60%
Parameters Payment Compliance OutcomeOutcome
Income Factors Less Likely to Pay Late
More Likely to Pay Late
Pension Income Pension vs. NoPension 27%
RRSP Income Income vs. NoIncome 60%
Tax-ExemptIncome
Exempt vs. NoExempt 138%
Main Source ofIncome
Investment/Rentvs. Wages 28%Capital Gains/LossCapital Gains/Lossvs. Wages 41%Self-Employed vs.Wages 64%Wages 64%
Further ResearchFurther ResearchA profile and compliance trends for:
• Taxpayers who use professional tax preparers to file their tax return;preparers to file their tax return;
• Taxpayers who use the Community Volunteer Income Tax Program to file gtheir tax return;
• Taxable filers;• Non-taxable filers; and • Refund returns.
QUESTIONS or COMMENTS?
THANK YOU
MERCI
Session One:Session One:Tax Systems and Taxpayer y p yBehavior
2009 IRS Research Conference2009 IRS Research Conference
Taxpayer response to the recent 'flat tax' UK capital gains tax (CGT) reform and theUK capital gains tax (CGT) reform and the implication for corporate tax simplification
P t J lfPeter JelfsMazars LLP
Introduction• UK corporate tax law is complex – the longest
in the world• Taxpayers and government both claim to want
it simplified• Every year the legislation increases in length
and complexity – why?• Taxpayer response to the recent CGT reforms
may help to explain
IRS Research Conference 2009
UK corporation tax• Companies taxed separately from their
shareholders• Controlled by statute, case law and practices
of HM Revenue & Customs (HMRC)• Legislation constantly updated• Responsibility usually delegated by
government to HMRC
IRS Research Conference 2009
Reasons for complexity• Complexity can arise through length of
legislation or language usedA b f ifi f t i th UK• A number of specific factors in the UK:
Conflict bet een polic goals• Conflict between policy goals- often equity and simplicity
• Fiscal incentives- create distinctions- create distinctions
IRS Research Conference 2009
Reasons for complexity (2)• Anti-avoidance legislation
- loopholes created and exploited
• Tax Law Rewrite Projectj- designed to simplify language
IRS Research Conference 2009
Reasons for complexity (3)Other reasons:• Relieving capital expenditureg• Tax neutrality• Earlier shortcomingsg• True reflection• Transfer pricingTransfer pricing
IRS Research Conference 2009
Effects of complexity• On first principles length of legislation can measure complexity• UK tax law increased from 5952 pages in 2001 to 10134 in 2008• Cost/benefit analysis for obtaining tax advice• Compliance falls through ignorance rather than evasion• Several surveys conclude taxpayers find
t t lsystem too complex
IRS Research Conference 2009
‘Flat tax’• Two kinds – Hall Rabushka (HR) and Eastern European (EE)• HR a theoretical consumption based tax – not well known in UK• Flat tax in UK means EE• EE flat tax retains income base but has single rate of tax
IRS Research Conference 2009
Flat tax and simplification• Debate in UK as to whether flat tax would simplify legislation• Possible removal of capital/income planning and fewer exemptions• Effect on length of legislation predicted to be small
IRS Research Conference 2009
CGT reforms• 9 October 2007 – flat tax rate of 18% on capital gains for individuals• Substantial simplification of CGT legislation• Removal of complex calculations of taper relief reducing gain depending on time asset held and whether used in business• Taper relief described as ‘a mess’ – range of CGT rates from 5-40%
Di t t d i t t d i i• Distorted investment decisions
IRS Research Conference 2009
CGT reforms(2)• UK government does not like ‘flat tax’• Critical report in 2005 mainly on equity grounds y y g– reduction in marginal rate for highest earners• Report considered important the fact that no flat tax introduced in a Western economy• Government introduced this reform with flat tax simplification arguments – ironic!• How will taxpayer respond?
IRS Research Conference 2009
CGT reforms(3)• Bitterly denounced by small business representatives!• Reason – flat rate was higher than the current 10%• Tax practitioners – pragmatic approach by schemes to avoid new rates• Simplicity a principle easily sacrificed
IRS Research Conference 2009
Government response• Quickly gave in• Introduced ‘entrepreneur’s relief’ to maintain 10% rate on first £1 million of capital gain –remainder at 18%• Simplification implications – disastrous• No simpler than taper relief and less generous
IRS Research Conference 2009
Conclusions• Classic example of taxpayer response to a radical system change• Rate of tax is the key factor• Simplification will remain elusive
IRS Research Conference 2009
Session One:Session One:Tax Systems and Taxpayer y p yBehavior
2009 IRS Research Conference2009 IRS Research Conference
Tax Systems and Taxpayer y p yBehavior
Discussant: Pamela Olson
Sk dd A Sl t M h & Fl LLPSkadden, Arps, Slate, Meagher & Flom LLP
2009 IRS Research Conference2009 IRS Research Conference
Session One:Session One:Tax Systems and Taxpayer y p yBehavior
2009 IRS Research Conference2009 IRS Research Conference
During the break, please visit the SOI Booth in the upperthe SOI Booth in the upper lobby.
2009 IRS Research Conference2009 IRS Research Conference